TMI Blog2020 (7) TMI 545X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. [2017 (10) TMI 1011 - SUPREME COURT] Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rought outside Mumbai to be installed at the Vasai East Development Project. The Project was to be completed by 26.07.2009. 4. With regard to Assessment Year 2007-2008, the Assessee filed a Return of Income on 21.08.2007 showing nil profit, as a loss of INR 23.5 lacs had allegedly been incurred in relation to the activities carried out by it in India. 5. On 29.08.2008, a show-cause notice was issued to the Assessee by the Income Tax authorities requiring it to show cause as to why the Return of Income had been filed only at nil, which was replied to in detail by the Assessee on 02.02.2009. Being dissatisfied with the reply, a draft Assessment Order was then passed on 31.12.2009 ( Draft Order ) by the Assistant Director of Income Tax International Transactions at Dehradun ( Assessing Officer ). This Draft Order went into the terms of the agreement in great detail, and concluded that the Project in question is a single indivisible turnkey project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India. This Court s judgment in Commissioner of Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the Assessee s objections, the Draft Order was made final by the Assessing Officer on 25.10.2010. The Assessee then filed an appeal against the Assessment Order before the Income Tax Appellate Tribunal ( ITAT ). 8. The decision of the ITAT on 30.08.2011 went into the establishment of the Project Office at Mumbai in much more detail than had been gone into either in the Draft Order or the Dispute Resolution Panel s decision. The ITAT referred to and relied upon an application dated 24.04.2006, which had been submitted by the Assessee to the Reserve Bank of India ( RBI ) for opening the Project Office, which in turn referred to a Board Resolution of the Company dated 03.04.2006 for opening the Project Office in India. It further referred to correspondence showing that one Mr. Sangsoon Park, the General Manager of the Assessee Company, had been appointed as a representative of the Company to sign documents for opening of the Project Office and a bank account in India, and to look after operations of the Project Office. After setting out the Board Resolution dated 03.04.2006 in detail, the ITAT concluded: 70. It can be seen from all the above documents that the scope of Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. This argument was disposed of as follows: The way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rement, fabrication, transportation activities) was attributable to the said PE, instead, in setting the issue to the file of the assessing officer? (iv) Without prejudice, whether, on the facts and circumstances of the case and in law, the Tribunal erred in not holding that even if the appellant had fixed place PE in India, no income could be brought to tax in India since the appellant had incurred overall losses in respect of the VED project? (v) Whether, on the facts and circumstances of the case, the contract was divisible/distinguishable pertaining to the activities associated with designing, fabrication and installation of platforms and, if so, whether the activities pertaining to designing and fabrication took place in any part of India? 11. By the impugned judgment dated 27.12.2013, the High Court found that the order of the Assessing Officer had been confirmed by the ITAT, and concerned itself only with the following question: In other words, can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India? 12. The High Court held that the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to tax. He also sought to distinguish the judgment in M/s DIT (International Taxation), Mumbai v. M/s Morgan Stanley Co. Inc., (2007) 7 SCC 1, and relied upon certain passages in a recent judgment reported as Asst. Director of Income Tax, New Delhi v. E-Funds IT Solution Inc. (2018) 13 SCC 294. He argued that the High Court judgment was cryptic and did not address any of the real issues that arose on the facts of this case. He further argued that it was completely incorrect to state that there was no finding that 25% of the gross revenue of the Assessee was attributable to the business carried out by the Project Office of the Assessee. On the contrary, he referred to all the documents that ITAT had looked at to show that the Project Office at Mumbai was not a mere liaison office, but was vitally connected with the core business of the Assessee and that therefore, in the absence of figures given by the Assessee, a best-judgment assessment had to be made of profits attributable to such permanent establishment. That best-judgment assessment, though made in the Draft Order and the Dispute Resolution Panel Order, has been set aside by ITAT, resulting in a remand to the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likewise encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. 4. Notwithstanding the preceding provisions of this article, the term permanent establishment shall be deemed not to include- (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or any other activity, if it has a preparatory or auxiliary character in the trade or busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount reconciliation and providing IT enabled services such as back office operation, data processing and support centre to Morgan Stanley and Company. Tackling the question as to whether a fixed place permanent establishment existed on the facts of that case under Article 5 of the India-US treaty which is similar to Article 5 of the present DTAA this Court held: 10. In our view, the second requirement of Article 5(1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Court found: 16. On reading Article 7 of the CADT, it is clear that the said Article is based on OECD Model Convention. Para (1) of Article 7 states the general rule that business profits of an enterprise of one contracting State may not be taxed by the other contracting State unless the enterprise carries on its business in the other contracting State through its PE. The said Para (1) further lays down that only so much of the profits (sic as is) attributable to the PE is taxable. Para (2) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts OR on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE. 17. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialised. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has been involved can be said to be attributable to the permanent establishment. It gives rise to two questions, firstly, offshore services are rendered outside India; the permanent establishment would have no role to play in respect thereto in the earning of the said income. Secondly, entire services having been rendered outside India, the income arising therefrom cannot be attributable to the permanent establishment so as to bring within the charge of tax. 86. For attracting the taxing statute there has to be some activities through permanent establishment. If income arises without any activity of the permanent establishment, even under DTAA the taxation liability in respect of overseas services would not arise in India. Section 9 spells out the extent to which the income of non-resident would be liable to tax in India. Section 9 has a direct territorial nexus. Relief under a double taxation treaty having regard to the provisions contained in Section 90(2) of the Income Tax Act would arise only in the event a taxable income of the assessee arises in one contracting State on the basis of accrual of income in another contracting State on the basis of residence. Thus, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5. 22. Dealing with support services rendered by an Indian Company to American Companies, it was held that the outsourcing of such services to India would not amount to a fixed place permanent establishment under Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 2nd July, 2003 Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) (Amendment) Regulations 2003 along with the copy of letter from ChoHung Bank for opening Bank account. 2. Copy of the POA in our favour and in favour of M/s Hemand Arora and Co., CA. 3. Certified copy of the POA in the name of the Mr. S.S. Park, who has signed the application. 4. Certified copy of the certificate of registration of the company in South Korea. 5. Certified copy of the notarised Board resolution for opening a Project office in India. 6. Certified copy of Extract of contract entered into by our client. Kindly take the above documents on record. Please take on record our client s Project office and register the same. If you require any clarification, please let us know 25. The Board Resolution dated 03.04.2006 referred to in this letter reads as follows: MINUTES OF BOARD OF DIRECTORS MEETING OF SAMSUNG HEAVY INDUSTRIES CO. LTD. A meeting of the Board of Directors of Samsung Heavy Industries Co. Ltd. (the Company ) was duly called and held on the 3rd day of April 2006 at the office of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of our judgment in E-Funds IT Solution Inc. (supra). 28. Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
